Cross-Tested 401(k) Profit Sharing Plan Illustration
The contributions for Cross-Tested Plans are based on the employees’ age, compensation, the employee classes, and the percent of contribution for each class decided by the employer.
Cross-Tested plans (also known as New Comparability or Age-Weighted Plans) work extremely well where the owners or key employees are more advanced in age than other employees. They are generally set up in conjunction with a 401(k) Profit Sharing Plan. The plan can be used with any number of owners, key employees, and other employees. The following is only one example of how a Cross-Tested 401(k) Profit Sharing Plan can benefit your company. This example illustrates the maximum contribution available for the owner while providing the minimum required contributions for the non-owners in order to pass the required nondiscrimination and participation testing:
| SUMMARY OF CONTRIBUTIONS | |||||||
| Employee | Age | Compensation | 401(k) Elective Deferral | 3% Safe Harbor Contribution | Profit Sharing Contribution | Total | Contribution as % of Compensation |
| Owner | 55 | $290,000 | $26,000 | $0 | $38,500 | $64,500 | 22.2% |
| Employee 1 | 55 | 63,000 | 0 | 1,890 | 901 | 2,791 | 4.4% |
| Employee 2 | 50 | 58,000 | 0 | 1,740 | 829 | 2,569 | 4.4% |
| Employee 3 | 45 | 53,000 | 0 | 1,590 | 758 | 2,348 | 4.4% |
| Employee 4 | 40 | 48,000 | 0 | 1,440 | 687 | 2,127 | 4.4% |
| Employee 5 | 35 | 37,000 | 0 | 1,110 | 529 | 1,639 | 4.4% |
| Employee 6 | 30 | 34,000 | 0 | 1,020 | 486 | 1,506 | 4.4% |
| Employee 7 | 25 | 36,000 | 0 | 1,080 | 515 | 1,595 | 4.4% |
| Total | $26,000 | $9,870 | $43,205 | $79,075 | |||
| SUMMARY OF TOTAL CONTRIBUTIONS | Total | % of Total |
| Total Contribution for Owner (including deferrals) | $64,500 | 81,6% |
| Total Contributions for Employees | 14,575 | 18.4% |
| Total Contributions & Deduction | $79,075 | 100.0% |
| SUMMARY OF TAX SAVINGS & CASH REQUIREMENTS | ||
| Total Contribution for Owners (including deferrals) | $64,500 | |
| Total Contribution & Deduction | $79,075 | |
| Less: Estimated INCOME TAX SAVINGS | – 36,000 | |
| Net Cash Paid Out | $43,075 | – 43,075 |
| Owner’s Contribution Paid by TAX SAVINGS | $ 21,425 | |
| CONCLUSION |
| Not only is the Owner receiving a contribution of $64,500 by only paying out a net cash amount of $43,075, the other employees are receiving contributions totaling $14,575 without any additional cash outlay after current tax savings. |
To find out more information about this type of plan and how it could specifically help you and your company click the email below to request that someone contact you.
Or Call us at:
Additional assumptions used in above calculations:
- Total Owner combined Federal & State Income Tax Rate assumed at 45%. You should consult your tax advisor as to the actual tax rates and your actual amount saved.
- The contribution and percents to the groups can vary year to year at the discretion of the employer, within legal limits.
- The numbers of participants included in the illustrations were limited for simplicity and comparability. However, all of the plans are able to serve from one to hundreds of participants.